Personal Finance

Life has a way of sometimes undermining one's plans, such as the expectations of most people that they will retire at 65. A debilitating illness or corporate restructuring, to name only two life-changing situations, can force retirement to happen a lot sooner.

About the Author

Michael Ryval, a regular contributor to Morningstar, is a Toronto-based freelance writer who specializes in business and investing.

Indeed, 62%, or roughly six out of 10 Canadian retirees admit that they retired sooner than expected, according to a survey conducted last fall by Vancouver-based Insights West and Credential Financial Inc. Being in this situation can result in a host of challenges. These include having to deal with financial shortfalls, or looking to supplement one's income through part-time work in a tough job market. There's also the emotional shock of being unexpectedly "packaged out," as the expression goes.

Not being prepared psychologically is perhaps the most difficult issue, says Tina Tehranchian, a certified financial planner (CFP) and senior financial planner with Assante Capital Management Ltd. in Richmond Hill, Ont. "Retirement is not just about having enough money. Being able to manage financially is a big part, but another component is being psychologically prepared. If you are not prepared, it can be a shock, especially if you enjoy your work. If you make a meaningful contribution, it is tough to deal with job loss. Your identity is tied to your work, and if you suddenly lose that, it's a shock to the system."

Although there are no statistics on the reasons for early retirement, there is certainly less shock for those who do so out of personal choice. "The bulk of my clients choose to retire sooner than expected due to health-related reasons, whether it's been a car accident or poor health has come into the picture and their careers have been cut short," observes Carolyn Humby, CFP, a St. Catharines, Ont., investment advisor with FirstOntario Investments, a credit union partner with Credential Securities Inc.

The biggest fear for those who retire early, notes Humby, is running out of money. "If they were making $80,000 a year, or $60,000, whatever the number was, they had that income to pay down the mortgage, buy a car, pay for this or that and get their kids through school. Now, maybe, they can't," says Humby, noting that the survey also found that one in three Canadians who are still working have not saved a single cent for retirement. "It makes them a little bit afraid to invest, because they are worried they will lose their money in the market. But they can't go into something that is deemed 'safe' because they will run out of money, for sure."

When clients are forced into early retirement they often discover they need a financial plan to address their needs. And to make it happen, a high level of trust between clients and advisors has to be in place. "If you don't address that emotional need they can't hear anything else that you are saying," says Humby. "Reassurance that there is a plan, and that it works, is key to addressing that fear of running out of money."

Humby and other financial planners offer several other tips.

It's important to get a big-picture view, with the help of a planner. So, if you retire at 55, for instance, and live to 95, that means you might live longer in retirement than the number of years employed. "You could be retired for 40 years," says Humby. "When you look at it that way, you will need more money for the first 10 or 15 years of retirement than you would need at age 80. You will have a simpler lifestyle as you age. All this has to go into the big picture."

Poor cash-flow management over a lifetime and a lack of savings are often at the root of the challenge, says Tehranchian. "Sometimes, early retirement is totally out of a person's control. Suddenly, you have to cope with a new reality." Whatever the scenario, she adds, planners have to examine the financial resources available, such as personal savings, company pension plans, RRSPs, Canada Pension Plan/Quebec Pension Plan and Old Age Security entitlements, and then put in place a viable plan. "People have choices. They may have to decrease their expectations of the lifestyle they wanted in retirement, or look for part-time work, or find a totally new career if it's not possible to retire early," says Tehranchian. "Planners help individuals deal with the new reality and put it into perspective. We will say, 'OK, you may not want to go back into the workforce. But you may have to settle for a much-reduced lifestyle. Maybe you have to sell your house and rent an apartment. That's one way to reduce your expenses.' There are many options, provided people have some financial resources."

Your desired lifestyle choices in retirement have to be weighed against your needs and abilities. In some cases, notes Humby, people will decide that retiring early is a better choice for their health, which may be fragile. "Two and a half years into retirement, this individual is quite happy with how it's going," says Humby, recalling a 53-year-old man who gave up a physically demanding job and supplemented a retirement package with income from far less demanding part-time work. "People told him he could never afford to retire. The budget he had to live with meant some sacrifices, sure. But what price is your health worth?"

In some circumstances, you may have no choice but to supplement your income with part-time work, in your own field or elsewhere. But this can usually be avoided, says Tehranchian. "If the planning is well executed, and your assumptions are correct, you shouldn't have to work part-time. But if retirement is way earlier than you expected, then part-time work could be the answer, assuming you are willing and healthy enough." Thanks to the growth of the online world, Tehranchian points to opportunities where people generate income from home-based businesses.

Be prepared for life's unexpected events. "There's no such thing as lifetime employment," says Jeanette Brox, CFP, a senior financial consultant with Investors Group in Toronto. "People have to be aware that for the past 25 years people have been downsized and 'right-sized' and forced to do contract work. The loyalty to employees is rare, if not there at all. People have to have their eyes open," says Brox. The answer, she adds, is to be disciplined about spending habits, monitor where the cash flow is going and be prepared for the worst-case scenario. "Build up a reserve fund with three to six months of living expenses," says Brox, who understands the emotional stress of losing a job because she was forced out of a management position with an electronics firm and later re-trained as a financial planner. "Put your savings into an RRSP and get the tax refund, which can go into the reserve fund. There are all kinds of ways to get the savings happening," says Brox. "But you have to be vigilant."

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